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Why there is no need to wait for a stable market before launching Shenzhen-Hong Kong stock connect scheme

Any broker will tell you investors like to trade when the markets have big movements

PUBLISHED : Monday, 15 February, 2016, 4:14pm
UPDATED : Monday, 15 February, 2016, 4:14pm

Beijing should not wait for the market to stabilise to launch the Shenzhen-Hong Kong stock connect scheme and should introduce it as soon as possible to help attract more capital inflow to the mainland China.

Hong Kong Exchanges and Clearing chairman Chow Chung-kong said last Thursday, on the first trading day of the Year of the Monkey, that the long-awaited stock connect scheme between the Hong Kong and Shenzhen stock markets would definitely be launched but it would need to wait for the stock market to stabilise.

After the Hang Seng Index lost more than 700 points on Thursday in the biggest fall on the first trading day of a Lunar New Year since 1994, brokers interpreted his remarks as meaning the scheme would be launched in the second half of this year at the earliest.

But that would not be appropriate because any broker will tell you investors like to trade when the markets have big movements instead of in quiet markets. Even in a falling market, people like to buy when the share prices drop to more reasonable levels.

It should be left to investors and not the regulators to decide when it is appropriate to enter the market

As such, the mainland regulator should launch the new scheme whenever the platform and regulatory measures are ready and not when the market is stable. It should be left to investors and not the regulators to decide when it is appropriate to enter the market.

Then there’s the capital flow issue. The depreciation of the yuan, which dropped more than 5 per cent against the US dollar last year and is expected to fall further this year, has led to many mainlanders rushing to buy US dollar or Hong Kong dollar investment products and life insurance policies to hedge their risks.

The launch of the Shenzhen-Hong Kong stock connect would not worsen the situation because most mainland investors have accounts in both the Shanghai and Shenzhen stock markets. Investors who want to trade Hong Kong stocks could already have done so by trading via the Shanghai-Hong Kong stock connect.

The launch of the Shenzhen-Hong Kong stock connect would, however, open a new leg and new market for northbound trading – with international investors able to trade Shenzhen-listed companies in addition to Shanghai A shares.

A recent survey by the Hong Kong Investment Funds Association found international investors were interested in the Shenzhen stock markets because it is home to many potential high growth companies. Retail brokers in Hong Kong would also like to see Hong Kong investors allowed to trade Shenzhen stocks because it would boost their commission income.

That means the launch of the Shenzhen-Hong Kong stock connect is likely to result in new capital inflow to mainland China from both international fund houses and Hong Kong retail investors.

More importantly, many fund managers believe that a precondition for A shares to be added to MSCI’s benchmark emerging markets index is giving them the ability to trade in the Shenzhen stock market.

MSCI said in June last year that its decision to defer the inclusion of A shares in its global emerging market benchmarks for a second year reflected lingering investor concerns over market accessibility.

If Beijing allows the Shenzhen-Hong Kong stock connect to be launched soon, it would boost the chances of A shares being included in MSCI indices. And that would lead to more exchange traded funds buying A shares, further boosting capital inflow.

There is really no need to wait for the market to stabilise before launching the Shenzhen-Hong Kong stock connect.

enoch.yiu@scmp.com

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